Dilma's new tax polices on IT exports has stimulated Brazil software and services.

Among the most dynamic economies in Latin America, Brazil is best positioned to attract foreign investment in the IT outsourcing sector, according to a new study conducted by the consultant firm Prospectiva. The study was jointly commissioned by Brasscom, Brazil’s association of information technology companies and ApexBrasil, a government agency set up to support export. The report focuses on infrastructure, labor resources and regulatory conditions in Chile, Brazil, Argentina and Mexico, Colombia and Costa Rica.

Given the findings of the study, each country in the region has its own advantage and disadvantage when it comes to providing outsourcing service to foreign companies. That’s why investors need to understand each country separately before venturing into, the report suggests.

Tax Improvements

When compared to other countries in the region, according to the research firm, Mrs. Dilma Rousseff government’s recent measure to cut taxes (Plano Brasil Maior) for IT companies will tip the balance in favor of Brazil.

Under the new program, Plano Brasil Maior, companies need to pay 2.5 percent tax on their gross earnings. Reports say, in the second phase of the program, that percentage will be lowered to 2 percent for IT service providers, call centers and software writers. While Plano Brasil Maior has boosted the prospects for growth in the IT sector, salaries for IT workers remain on par with counterparts in Chile and Argentina.

The Brazilian software and IT services market is almost three times as big as Mexico’s. While Brazil’s IT market is estimated to be US$ 21 billion, Mexico’s is at around US$ 8 billion.

Mexico Comparison

However, Mexico exports almost twice the value of IT services and software than Brazil does, because it is closer to the United States. In other words, while Mexico exports IT services worth US$ 5 billion, Brazils earns just US$ 2.65 billion from the same business.

The numbers make it clear that, many times, IT companies may consider arriving in Brazil focusing more on its own market than exporting services to other countries. According to the report, Mexico has larger workforce to offer and its location close to the US and the free trade agreement makes it a better choice for foreign companies.

Colombia is well-positioned because of by tax-free production areas, but lacks a vast market and has few local players in the area, Prospecta says.

Costa Rica – also considered competitive due to its free-tax zones, free trade agreements and low salaries and labor costs ­– has several limitations, including its low population and lack of dynamic internal IT market. Similar constraints are found in Chile.

Argentina compares relatively well to its regional peers. According to the report, Argentina has favorable regulatory conditions for IT. Its ever expanding English-speaking population and cheap energy create strong conditions for outsourcing companies. Still, Argentina has political and juridical uncertainties, high inflation and low direct foreign investment

Domestic Expansion

Even though the costs of production in Brazil are considered high, foreign IT players and local companies are frequently expanding operations in the country – driven by the attractiveness of the domestic market.

Sign up for our Nearshore Americas newsletter:

Brazil’s biggest weaknesses are high costs of the electricity, rickety telecommunication infrastructure, complex taxation system and a lack of international commercial agreements for the services sector.

“We observe that, despite of the high currency and the lack of international agreements that include service chapters, Brazil has the biggest number of relevant and internationalized companies in the region. We believe that the heated domestic market favors the development of the local companies that tend to expand abroad naturally. In other countries of the region, that expansion tends to happen after the signature of international agreements”, says Antonio Gil, president at Brasscom.

Currency Concern

One point that stands out in the report is how the exchange rate in each of the countries considered impact IT and services exports. Most of the Latin American currencies have gained value in comparison to the American dollar. But two countries contrast this trend.

Argentina`s peso has lost much of its value in the past few years due to macroeconomic policies implemented by Christina Kichner`s government, which closely controls the value of the peso. The other one is Mexico, which has set economic policies to align with the US economy. The lower value of both currencies makes them more competitive when it is time to export software and IT services.

The Argentinean peso has lost about 45% of its value in comparison to the US Dollar from 2007 up to now, while the decrease of the Mexican peso value was of about 47%. The Brazilian real, on the other hand, has gained 31% over the dollar on the same period.

International Agreements and Broadband

Even though Plano Brasil Maior has played an important role on lowering costs for employers, the Brazilian government has generally taken a ‘hands-off’ approach to the IT exports sector.

Another segment in which the country is not very well positioned is broadband. Mexico and Chile are considered the two countries with higher penetration per inhabitants and lowest monthly costs for high- speed services (measured in American dollars). Colombia has the higher costs with the lower speed, followed by Brazil and Costa Rica.